WEN CEO SHAKEUP

Wendy’s announced this morning that Roland Smith will be retiring and making way, effective September 12th, for Emil Brolick, COO at Yum Brands.

This morning’s announcement has a number of implications for Wendy’s that range from positive to negative with, we believe, more of the former than the latter.

Emil Brolick is joining a company with which he is very familiar; from 1988 to 2000, he held a variety of marketing positions at Wendy’s and worked closely with founder Dave Thomas. He was viewed favorably by the investor community during his time at Wendy’s. At the time of his departure, the company was performing very well. From there he joined Taco Bell, where he helped improve sales and profits through new products and remodeling restaurants.

Roland Smith retiring is certainly not a good concurrent indicator of the performance of the company. The recent news that WEN is suing significant franchisees Lewis Topper and Jeffrey Coughlan and their WendPartners Franchise Group is concerning. The disagreement seems to be anchored on the purchasing of new equipment key to the rollout of the new burgers (WEN – A SMOOTH TRANSITION FOR THE NEW BURGER, 8/1/2011). As we wrote on August 1st, the rollout of the new product is crucial to the Wendy’s turnaround story. Roland Smith leaving does not convince us that Wendy’s is on the precipice of a turnaround, nor does it convince us that the relationship with the franchise-base is as good as it needs to be during this phase.

A month ago, our takeaway was that we view the stock favorably over the longer term but see the turnaround taking longer than expected, leading us to take a negative view over the near term. While the company’s most formidable competitor, MCD, marches on with its own remodel program, a change in CEO is only going to further push out the timetable for the WEN turnaround. While the transition should be smooth, given Mr. Brolick’s familiarity with the company, he will likely examine the initiatives that are being pushed through and make adjustments where necessary. In our view, he is likely to let some initiatives, like the new food items, proceed as planned but may cast a more critical eye on other plans that have been more cumbersome, like the remodel program.

Over the longer term, we believe that Mr. Brolick joining Wendy’s will be a positive for the company given his proven track record at the company, his understanding of the company’s core principles, and the probability that his tenure will likely serve as an opportunity for the relationship with franchisees to be improved.

The stock faces several headwinds at present, such as high beef prices, and we believe that near-term guidance could come down. Ultimately, Roland Smith’s departure signals that business at Wendy’s has not been strong but perhaps the most expedient path to achieving the turnaround is via new leadership.

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